Taiwan Semiconductor (TSM 1.80%) might not be a household name, but it’s probably the most important company most people have never heard of.

The company, which now has a market cap of roughly $1 trillion, doesn’t have the consumer presence of Apple or Microsoft, but it’s a vital component of the tech supply chain. TSMC, as the company is also known, is the world’s leading contract chip manufacturer. It makes more than half of the third-party chips in the world and roughly 90% of the advanced chips.

It’s the foundry that fabless chip designers like Nvidia, AMD, and Broadcom count on to manufacture their chips, and it counts Apple as its top customer, showing its key role in empowering the world’s largest consumer technology company.

TSMC’s leadership puts it in an enviable position, which explains why the stock has historically outperformed, and why it’s one of the most valuable companies in the world at a market cap of $1 trillion.

But is Taiwan Semi a buy today? Let’s take a closer look at what the company has to offer investors in order to figure it out.

Image source: Getty Images.

Where TSMC stands today

These days, Taiwan Semi’s competitive strengths appear to be strong and getting stronger. Not only is TSMC benefiting from both the artificial intelligence (AI) boom and a broader cyclical recovery in semiconductors, but its top rivals like Samsung and Intel have both faltered recently, setting the company up to gain market share.

Taiwan Semi’s recent results show both impressive growth and wide profit margins. Revenue in the third quarter jumped 39% to $23.5 billion, and it reported net income of $10.1 billion, giving it a 43% profit margin.

The company also extended its advantage in advanced chips, as advanced technologies, which it defines as 7-nanometer wafers or less, reached 69% of revenue in the quarter, and 3-nm revenue went from 6% in the quarter a year ago to 20%, showing revenue from leading-edge chips involved in AI and other high-tech applications is rapidly growing.

Additionally, Taiwan Semi is rapidly expanding around the world, diversifying away from Taiwan, which is seen as a risk due to the threat from China. TSMC has secured up to $6.6 billion from the CHIPS Act to build plants in Arizona, and it’s also opening new fabs in Germany and Japan.

TSMC pioneered the contract chip model, and years of investment in foundries and R&D has given it a sustainable competitive advantage in an industry that continues to experience significant secular growth.

Meanwhile, Intel’s decision to send CEO Pat Gelsinger into retirement indicates it may be pulling back from his push to open Intel’s foundry business to outside customers, and Samsung recently apologized for a disappointing performance, including in its memory-chip business. That shows that the competitive threat to the company seems to be waning.

Is TSMC a buy?

TSMC has a wide economic moat and solid momentum in its business, but that alone doesn’t make the stock a buy, as investors also need to consider the valuation.

On that account, Taiwan Semi looks solid, as it currently trades at a price-to-earnings ratio (P/E) of 31, which is very reasonable for a company growing as fast as it is. Taiwan Semi’s base in Taiwan also poses a geopolitical risk, but the company is taking steps to manage that by diversifying its manufacturing base across the world.

Based on its growth rate, valuation, profitability, and competitive advantages, Taiwan Semi looks like an excellent stock to buy, especially as it looks set to continue benefiting from the AI boom.